A review of Economyths: Ten Ways Economics Gets it Wrong, by David Orrell

David Orrell, a mathematician who works on biological problems, recently published a book called Economyths: Ten Ways Economics Gets It Wrong.Economyths is a terrible, willfully ignorant, deeply anti-intellectual book. The characterization of economic thought presented is ridiculous. The level of scholarship is abysmal.

To avoid misunderstanding: Economics, like every other discipline, benefits from criticism. Anyone who’s ever attended an economics seminar knows that economists are vicious critics of each other, and criticism from other fields builds knowledge as well. However, criticism must be informed to be valid or valuable. Economyths is uninformed criticism.

The story Orrell tells over and over: Mainstream economists believe the economy is a perfect, stable, “God-like” machine which maximizes human happiness. All markets are always perfectly competitive, and the income distribution which results from markets is completely fair. Since the market is perfect and fair any all government intervention necessarily reduces happiness. “The price is right,” always and everywhere, as Orrell repeatedly puts it. There is little or no empirical work done by economists, theory tells us everything. There is only one type of government intervention economists support: subsidies to failing firms. Economists believe these things because this is what we are taught by senior economists, and senior economists are “part of a giant global conspiracy — an attempt to distract us from the real game that is being played behind the scenes.” (I am not making this up.)

To illustrate the level of scholarship on display, Orrell spends several chapters discussing the scandalous fact that economists oppose any and all government intervention to protect the environment, whereas ecologists argue we should instead implement policies invented by non-economists, such as carbon taxes or tradable emission permits, to reduce environmental damage. Of course, these are actually standard policy prescriptions in mainstream economics; last week there was a bit of an internet debate over whether there is even single economist who opposes carbon taxes to mitigate climate change.

Economists oppose carbon taxes and all other environmental interventions, according to Orrell, because “such schemes violate the neoclassical principle that we shouldn’t monkey with the market.” There is a field called “environmental economics,” Orrell notes, but the entire field just consists of one result: the First Welfare Theorem, which environmental economists interpret as a mathematical proof that environmental policies can only possibly do harm. To demonstrate this is so, Orrell quotes an environmental economics textbook (Hanley et al 1997) apparently plainly stating as much:

As one textbook on environmental economics states, in a perfect market, “prices ration resources to those that value them the most and, in doing so, individuals are swept along by Adam Smith’s invisible hand to achieve what is best for society as a collective. Optimal private decisions based on mutually advantageous exchange lead to optimal social outcomes.”34

If we look up the passage in the textbook, we find Orrell has curiously omitted the remainder of the passage:

Rather, prices ration resources to those that value them the most and, in doing so, individuals are swept along by Adam Smith’s invisible hand to achieve what is best for society as a collective. Optimal private decisions based on mutually advantageous exchange lead to optimal social outcomes. But for environmental assets, markets can fail if prices do not communicate society’s desires and constraints accurately. Prices often understate the full range of services provided by an asset, or simply do not exist to send a signal to the marketplace about the value of an asset. Market failure occurs when private decisions based on these prices, or lack of them, do not generate an efficient allocation of resources.

This is from the introductory chapter of the textbook, which proceeds to discuss habitat destruction in Madagascar as an example of a situation in which government intervention is very desirable.

The quote is taken entirely out of context to the point of outright deception. Orrell is not entirely to blame here, the reference is given in Economyths is not directly to the textbook, it’s as quoted in another piece. Instead of actually reading anything at all about what economists think about the environment, Orrell defers to English Literature professor Robert Nadeau‘s ridiculous hatchet job in pop magazine Scientific American. Orrell is not off the hook: this is a level of scholarship which would be considered unacceptable at the grade school level.

Anyone who has so much as skimmed an Economics 101 textbook or even the Wikipedia page on environmental economics knows that environmental economics does not begin and end with “the price is right.” If I type “what do economists think about the environment?” into Google, the first hit is a piece by Don Fullerton and Robert Stavins overturning popular myths about what economists think about the environment. “Myth #l: “Economists believe that the market solves all problems.” Shouldn’t someone writing a book on what’s wrong with modern economic thought understand basic economic ideas at a level a complete layman could obtain in ten minutes of Googling or flipping through an Econ 101 textbook, or for that matter even vaguely keeping up to date on current events by reading newspapers?

The rest of the book is no better. Orrell begins by explaining the Economics 101 version of supply and demand in a way that would get an 18 year old flunked out of Economics 101, and it’s all downhill from there, one wrong claim about what economists believe after another. A few of the amazing (-ly wrong) things I learned about economics from this book:

If asset prices are variable, supply and demand is wrong.

There do not exist any empirical estimates of supply or demand curves.

If expectations over future prices affect current demand, supply and demand is wrong.

If future asset price movements are not forecastable, then supply and demand is wrong.

Economists have never heard of emergent properties.

Economists insist on using math. Instead we should use agent-based models. Which are apparently not mathematical.

“Finally, another thing missing from neoclassical economics – and again it’s a big one – is the future. Because neoclassical economics assumes that the economy is at or near equilibrium, it ignores the effect of time and concentrates on maximizing utility in the short term.”

“Economists are taught that the economy is the net result of the actions of individual investors, who act independently of one another to maximize their own utility.”

Economists think everything is Gaussian. Finance folks in particular have never considered fat-tailed distributions.

Economists categorically reject bubbles everywhere and always.

The efficient markets hypothesis only exists in its strong form, and all mainstream economists believe it to be true.

Economic theory says that firms should only act in their short-term interests, because if a company considers the long term it will be taken over by competitors. “Economics likes to live only in the present.”

(1) The world income distribution is becoming more unequal. (2) This is occurring because CEO pay is rising. (3) Economists control this process and are to blame for inequality.

Economists believe economic growth is always and everywhere a good thing.

Mainstream economics has nothing to say about oil or other natural resources. Such things are ignored by economists, who just assume everything is infinite [My personal favorite anti-economist canard: Economists just don’t understand scarcity!]

Economists believe money and happiness are the same thing.

I should emphasize this is hardly an exhaustive list of errors in the book, and the omissions are equally glaring—there is nothing an interested layman could possibly learn from this book. Contrast with informed criticism from outsiders. A good, albeit old, example is Steven Rhoads’ The Economist’s View of the World. Rhoads is a political scientist who spent a decade immersing himself in economics before publishing his book, which consists of an accurate and insightful summary of many elements of economic thought, followed by Rhoads’ criticism. This is informed criticism: even when I disagree with Rhoads’ objections to what economists believe, I don’t disagree on Rhoads’ description of what economists believe. I don’t think there’s a single sentence about what economists believe in Economyths with which I agree.

It’s fascinating and disturbing this sort of work is taken seriously in some circles. Then again, Of Pandas and People has been published continuously since 1989.